Usury, or Burning Down the House

Usury, St. Thomas Aquinas tells us, consists in selling what doesn’t exist. He uses the example of wine: to sell the use of the wine separately from the wine itself would be illicit, since the wine itself cannot be separated from its use.

St. Thomas contrasts this with a house. A house is something which can be “rented out”: that is, its use can be separated from the thing itself. Wine cannot be rented; it can only be consumed.

Now, St. Thomas had a certain understanding of the nature of money. He was under the impression that it was impossible to “rent” money: that the use of money could not be separated from the money itself. History has born out that this is not true of money though: that like a house, money can sometimes be put to use and then returned. In such a case, paying for the privilege of the use of money is not usury.

Let us note, however, that there is more than one kind of thing one can do with a house. It is true that it is possible to use a house without consuming it, by living in it and keeping it maintained. It is equally possible, however, to consume a house: to burn it down for entertainment, for example. And inasmuch as the use of a house consists in its consumption, its use cannot be separated from the thing itself.

The same, naturally, is true of money. When its use consists in its consumption, charging interest for a loan of money is requiring payment for what does not exist, and therefore, following St. Thomas, is contrary to justice.

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§ 14 Responses to Usury, or Burning Down the House

I take it that for Aquinas to say that a thing is consumed in its use is to say that once you use it you don't have it anymore. Otherwise it's hard to see how money would be consumed it is use, since you don't typically use money by burning it up, etc.

If that's what Aquinas means, then money will be consumed in its use regardless of what it is you are exchanging for the money. So the attempt to reconcile Aquinas with Belloc fails.

There are several errors in Aquinas' argument here, but I think the key one is that he doesn't seem to understand how a bottle of wine could be valued differently than another. So if we agree that I'll give you a bottle of wine now and in exchange you'll give me two bottles of wine in a year then I must be selling you my bottle twice. But that isn't the case. The value of a bottle of wine can differ greatly depending on a host of factors. Similarly, the value of a given amount of money lies in what the money can be exchanged for, and that is going to vary depending on a number of factors, including the time and place. It may well be that $100 today is the equivalent of $103 a year from today, just as a $100 US may be the equivalent of $103 Canadian.

I can't make sense of most of the comment, because you seem to be denying that there is a difference between consuming a thing and using it without consuming it. Yet there manifestly is a difference, as in the examples given.

I could even use a bottle of wine – say put it on a shelf as a decoration – without consuming it, and “renting” it to me for that purpose would be licit. (It also might be licit for me to charge for “storing” it in such a case). But its ordinary use is to drink it, which is clearly consumption, and is clearly what Aquinas was referring to. That his example of the ordinary use of wine doesn't enumerate all possible uses of a bottle of wine doesn't really undermine his point, nor does it undermine Belloc's, as far as I can tell.

The only significant difference between Belloc and Aquinas that I can see is that the “use” in question for Belloc is the use of that object which the money purchases. The lender in effect purchases the object and lends that object to the borrower.

Aquinas didn't think that money was literally consumed in its use. He wasn't an idiot. You don't eat money; you exchange it for something else. So when Aquinas speaks of money being consumed in its use, he is obviously being analogical. How so? Best I can tell, the analogy is in the fact that after money is used you don't have it anymore. Just as you can't have your cake and eat it too, you can't spend money and have it too.

Again, though, the problem with Aquinas' argument is not that he thinks money is consumed in use, but that he has simplistic view of what determines the value of an object. Take Aquinas' wine example. I give you a bottle of wine; in exchange, you promise to give me two bottles of wine at some later date. Aquinas says the exchange is usurious, that I am selling you the same bottle twice. But that's just wrong. There's nothing inherently usurious about exchanging one bottle of wine for two. And if Aquinas' argument doesn't even work for wine, drawing an analogy between wine and money won't help him.

If you don't think I've done Aquinas' argument justice you're free to explain why. In the meantime, though, I find it interesting that you appear to be ducking my question. Do you think an exchange of one bottle of wine for two is usurious, or not?

Aquinas wrote:Accordingly if a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice. On like manner he commits an injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury.

Yes, I agree that that is usury.

Perhaps you can turn this into a more positive discussion by saying what kinds of mutually consensual transactions in the modern economy you believe to be usury. Or is it your position that there is no such thing as usury?

Aquinas says that “he commits injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury.” Is it your view, then, that it is usurious to exchange a bottle of wine now for two bottles in the future, or do you not think that's what Aquinas was saying?

P.S. I answer your question about what I consider usury in the other thread.

A house is something which can be “rented out”: that is, its use can be separated from the thing itself.

Well, it's a little more complicated than that. A house has a limited useful life, of around 60 years or so, in practical terms, if I try to keep it up decently. If I don't put a dime into it, it's useful life drops down to much less. If I rent out the house for 60 years while maintaining it, I still get back darn near zilch at the end: more properly, what modest value I get back at the end mostly represents the additional effort I put in, not my original value. Tax rules make this clear: renting it out, you can deduct the depreciation on the house because of its wear and tear. (The tax rules allow you to depreciate it over a lot shorter period than 60 years, but that's for simplicity rather than an absolute reflection of usual conditions.)

Oh, yeah, well 60 years is a heck of a long time. So let's take something more obvious: If you take a sofa and rent it out for 3 years, typically what you expect to get back is not something with the same value of the couch at beginning. When you sell the “use” of the thing, you are really selling the “use it up” of the thing, in some measure, along with the use.” Even money deteriorates over time – ask the Treasury Dept how much it costs to simply maintain the money supply.

In addition to the wear and tear of the item, which is implied with its use, there are other factors that give the owner a reason to charge over and above the “use”. The risk of loss, the risk that the borrower will go bankrupt and not pay his debt. If one regularly lends out, lending without accounting for the losses will eventually consume your wealth.

None of which directly contradicts Zippy's thesis. Just makes some qualifications beneficial.

What is not clear, however, from his argument, is how what the borrower intends to do with the rented object changes the nature of the act of lending. If a homeowner rents his house to a movie studio thinking that they are going to sleep there and eat meals, or film people doing things like sleep and eat meals, he probably expects to get the house itself back, sure. And if he gets the house back, he will certainly charge them rent for the use while they had the use and he didn't. Suppose, though, that the studio wants the house to blow it up. They do that, and then (in perfect fairness, of course) rebuild the house and hand it back to the owner. Does he charge them rent? Of course he does. But why, if their use was to consume it? It is because their consuming it was not inherent to the borrowing it, and did not constitute the borrowing as a different kind of act than that of a renter who intended to sleep in the house or film ordinary home life in the house.

So the question is, is borrowing for consumption something that is USUALLY for consumption inherently different from borrowing for consumption something that is USUALLY used and returned in like condition? And, to be thorough, is borrowing for consumption something that is usually used and then returned an inherently different kind of act than borrowing the same object for use and return?

I can't think of why “usually” creates the fundamental difference. And I can't think of anything that cannot be lent for use and return, for whatever bizarre reason. If I lend a farmer 5 tons of wheat, and he plants it, is that consumption or not? Of course, his use destroys the object, but destroys it in the expectation that it will multiply many-fold, and most people call this investment. But the investment may fail, the wheat may not come up, and then the object is consumed and gone.

More needs to be said than merely that (for some things) the use of a thing consumes it, for it is not always true, and it is not always true in the same sense.

Well, it's a little more complicated than that. A house has a limited useful life, of around 60 years or so, in practical terms, if I try to keep it up decently.

Depreciation does throw a wrinkle into the analysis: though as we'll see, it isn't as wrinkly as first appears.

If one regularly lends out, lending without accounting for the losses will eventually consume your wealth.

I agree, and in general there seems to be relative permissiveness with respect to preventing losses: that is, where the loan itself is gratuitous, but the borrower is charged for actual costs to the lender, simply to keep him from actually losing money. My sense is that once that starts to look like a profit, though, we are back in the verbotten zone.

What is not clear, however, from his argument, is how what the borrower intends to do with the rented object changes the nature of the act of lending.

It isn't so much what he intends to do as what he actually does. A loan for consumption is by its nature “full recourse”: that is, there is no asset to which the lender has recourse. He only has recourse to the borrower himself, because what was purchased with the money no longer exists: it has been consumed.

A loan for something which is not consumed, however, need not be full recourse: there is built in collateral in the form of the thing purchased with the money, and the “lender's” recourse need not extend beyond that collateral. And it turns out, as I point out the post above, that the difference between non-recourse and full recourse transactions – we would call both of them “loans”, but to the medievals AFAIK lending inherently meant “full recourse” – makes all the difference between a loan for which it is illicit to charge any interest above actual costs, and a partnership in which the “lender” is entitled to profits.

Continuing to feel my way around on the floor, Vix Pervenit refers to “certain other titles-which are not at all intrinsic to the contract-[which] may run parallel with it”: compensation for actual expenses seem to fall here. It also refers to “… contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. From these types of contracts honest gain may be made.”

What this is coming to is that Belloc's catechesis on the subject appears be a condensation of the following:

(1) It is licit to recover principal and expenses from full-recourse loans, but no profit.

(2) It is licit to take profits from what we today would call non-recourse loans. Because they are non-recourse, they inherently involve investment in productive things, things which retain their value over time as they are used (caveat depreciation).

“Investment” in a dinner bought on a credit card wouldn't work here: if the lender only has recourse to the dinner, and I already ate it, well, tough cookies for the lender. I owe him (unless he is a usurer) the price of the dinner and nothing more, since all I got was the dinner. The house, on the other hand, still stands after a year of renting. And if we have mutual title to it – a title with a lien on it – and the “loan” is non-recourse, then it is a business partnership. It is fine for me to use the house to enable me to have a job and work for profit; it is fine for him to make a profit from our mutual partnership, in which we both share the risk of loss.

So, while he may in fact be wrong about some elements of this, or even all of it, it is simply wrong to cast Belloc's view into the outer darkness. His is a legitimate understanding based on a legitimate reading of the Tradition and the Magisterium, a genuine thread in Catholic thought, as far as I can tell, with all the usual caveats.

So, while he may in fact be wrong about some elements of this, or even all of it, it is simply wrong to cast Belloc's view into the outer darkness. His is a legitimate understanding based on a legitimate reading of the Tradition and the Magisterium,

I tend to agree.

It isn't so much what he intends to do as what he actually does. A loan for consumption is by its nature “full recourse”:

Sorry, you lost me there. Could you rephrase the concept to not include the word “for”, since that word implies intent?

If I lend John 100K to buy a house, and he goes out and spends it on a huge party, have I lent a consumer loan or done something else? The fact that what John does with it differs from why I lent it to him matters, how?

Seems to me that if I lend it to him with strictures and requirements and liens and recorded deeds of note and such, then these effect the conditions that make the loan not a consumer loan ALL BY THEMSELVES. But if I don't construct all those appurtenances and simply hand over 100K, telling him by word that this is for a purchase of specific house, and if he fails to repay I will take the house in repayment instead, the loan is essentially the same basic reality. What John then goes out and does with the money (throws a party) is completely separate from my act of lending and his act of receiving a loan. His violation of my express will in handing over the money doesn't change my act of making a non-consumer loan, does it?

Now imagine someone trying to sell a type of security that estimates the risk of a lent bottle of wine going bad. Call it the oxidation-default swap. Imagine that these swaps are sold altogether independent of the wine-lending operations, so that when Zippy lends me some fine Virginia wine, other folks are keen to discover as much as they can about it, so that they can start trading accurately on the chance that I, failing to finish the opened bottle in time, or foolishly leaving it out in direct sunlight, or whatever, will find my lovely Virginia vintage has turned to vinegar.

So I ask: Is the “vinegar risk” on a vintage of wine something real, or would selling it be usurious?

Now imagine someone trying to sell a type of security that estimates the risk of a lent bottle of wine going bad.

In the security on that risk, it is irrelevant whether the bottle is lent or not, right? You can measure out the risk regardless of who holds it or how they hold title, can't you?

Seems to me that if you can charge interest for the risk of failure or non-payment on a loan, then you can measure that risk, and if you can measure it, you can insure it, which is effectively sharing the risk with a larger pool (please let's not get into the difference between mutual insurance and other insurance companies, and just assume you have mutual insurance here). Is an insurance company insuring a non-existent thing if they re-insure the risk? Then how could it be selling a non-existent thing to bundle the risk and securitize it?

I am no financial whiz, though, so I await the input of the elders and wisers.